Notice 2014-7, Earned Income Tax Credit

[Yaba J Daba]

My wife and I both have W-2s that are subject to Notice 2014-7. For the purposes of the calculating EITC , the TurboTax Deluxe online version provides the option of including both, either, or neither of this Income. In our situation, the optimal choice is to include only one of our incomes because if we use our combined wages we exceed the household limit. I gather this is legal because the software provides the option. My concern is that after reviewing the completed forms, I see no calculation for the IRS to refer to that explains how the value of the EITC was determined. Line one on the 1040 combines our income and it's later subtracted reducing our AGI, but  nowhere are the values that were entered in the software reflected in the forms. Specifically, the single income used to calculate the EITC is not available for an agent to review. What's likely to happen is the IRS will reject the EITC based on either earned  income being too high or AGI being too low. If we don't, in fact, qualify for the EITC, It's not clear to me why TurboTax presents an option to include only one of our non-taxable incomes. If we do qualify, it's not clear how the IRS is going to know this based on the way the forms are filled out. Is there anything I should add to filing to clarify this for the IRS, or is this wrong and needs to be changed before mailing it?

[RobertB4444 · Accepted solution]

Both of your incomes should be included in calculating whether you qualify for the EITC.  The system gives you the option to exclude any income that is not actually earned income from the calculation even if it was paid out on a W2.  That would be sick pay or severance bonuses - that kind of thing.  

In your case since these are both medicaid waiver payments then you can exclude one or both of them from earned income.  The system is allowing you to calculate this correctly.  Use the one that gets the best result.

[Edited 2/18/25  11:54 AM PST]

@Yaba J Daba 

@Yaba J Daba 

[Yaba J Daba]

If that's case, is it possible to edit the return? Note that it's already been paid for and downloaded for file by mail, but not yet submitted to the IRS.

Thank you 

[RobertB4444]

Yes, but you shouldn't need to.  See my edited reply above.

@Yaba J Daba 

[Yaba J Daba]

While worksheets that are labeled as "Keep for your records" are not normally submitted to the IRS with the tax return, are there any exceptions to this? The reason I ask is that last year the IRS initially rejected my claim for the Earned Income Credit when it was filed electronically through TurboTax  based on our (apparent) earned income being too high, similar to the scenario described in my original question. I wound up having to submit an explanation as to why I disagree and submit a host of evidence to support my position. Eventually, they gave me the credit, plus interest, but it was a giant ordeal involving multiple phone calls and several hour of waiting on hold. It's occurred to me that if they would have had the Earned Income Credit Worksheet, it might have been more clear, since there's nothing in the tax forms that show the actual math. Also, in the IRS guidance for notice 2014-7, it says to write "notice 2014-7" on Schedule 1, line s, which TurboTax does not add. This year, since I'm mailing the return, I can just add it myself. Would it be a mistake, though, to add the EIC Worksheet pre-emptively, given the general rule of not including worksheets? 

[BillM223]

If you are mailing the return, you can certainty do that.

But I would say that as a general rule, the IRS does not want paper, unless they specifically ask for it. This even includes the tax returns themselves on paper, which they discourage (but sometimes you just have to file on paper).

As an aside, I filed the 1040 tax return for my father a couple of years ago, and printed and mailed it in. Based on the letters and calls with the IRS, it was pretty clear to me that they did not enter his return into the IRS system - they asked me things like "where is the Schedule D", which was in the packet I sent. For all I could tell, they dropped the return on the floor and didn't pick up all the pages. So it's a good idea to avoid adding any more sheets of paper than necessary to the process.